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How to trade the FPA's Forex Daily Trading Signals

How to trade the Daily Trading Signals
by Pharaoh

Certain questions about how to interpret and trade the Daily Trading Signals come up over and over again in FPA's forums. I've answered a lot of these at various times, but never put all the questions and answers in one place before.

News trading can make or lose a lot of money very quickly. If you don't understand the terminology, you will be much more likely to lose.

For most news announcements, there is an expected number. This expectation is the average taken from a number of expert news analysts. The amount the actual number released differs from the expected number is called the deviation. If most of the experts agree on a very narrow range, then the pre-news market action usually won’t be as volatile, and reaction to a large deviation should be greater. If expert estimates are all over the place, then the market can get very jittery before the news comes out and reaction to the news can be much less predictable.

A revision is a recalculation of the previously released number. The monthly released number for employment, unemployment, consumer confidence, etc., is usually just a very good estimate. The next month, whatever group or agency released the data will update (revise) the prior number, usually at the same time they release the new one. Obviously, some numbers (like an Interest Rate Statement) are not subject to revision.

Large revisions can have very strange effects on the market. For example, if a country’s employment numbers were up by 20,000 last month and are up by 40,000 this month, that would show not only new employment, but solid growth in employment – this is usually good for a nation’s currency. If last month's number is revised from 20,000 to 25,000, that would probably be considered even better. On the other hand, if last month’s number is revised down to 1000, traders could interpret this month’s numbers as so much better, or could lose confidence in the accuracy of this month’s numbers. If last month’s number was revised upward to 60,000, this would mean that more people are working (good!), but that this month’s numbers are actually a decline in the rate of job creation (bad!) and that the current release isn’t very trustworthy (confusing!). This at least partially explains some of the wild price swings when there is a large revision in the previous release.

Placing a trade is also called “pulling the trigger.” A news trigger is the minimum amount of deviation to make it worth placing a news trade. For example, the Daily Signals might say this month’s Canadian Beer Exports are expected at 3.2 million cases, and that there’s a 0.5 trigger. This means that a deviation of greater than 0.5 or less that negative 0.5 means you should place a trade. More directly, buy the CAD if production is 3.7 million cases or more, and sell the CAD if the number comes out at 2.7 million cases or less. The Daily Signals will tell you if you should be trading the USDCAD, AUDCAD, or some other pair for this specific report. (Disclaimer for the humor impaired – there is no monthly Canadian Beer Export report, but there should be!).

Depending on the currency pair, you might need to reverse the direction of your trade. For example, if there is a strong positive deviation in the quarterly Wool Production Report out of New Zealand (yes, this one is also a report I made up), you would expect the NZD to gain value when the report is released. This would mean buying the NZDUSD (or other NZDxxx pairs) or selling the AUDNZD (or other xxxNZD pairs). Similarly, reports that are good news for the USD mean to buy USDxxx or sell xxxUSD.

Just to really mess things up more, there are often multiple reports released at the same time. Usually, news traders will focus on only one report, but if other reports affecting the currency come out the other way, then price action can be unexpected. For example, one of the “Big 3” reports every month is US Core Retail Sales (also called Retail Sales ex-Auto). Since car sales are quite variable, it is simply the estimated amount of retail sales for the month excluding automobile sales. If the total Retail Sales deviates strongly in the opposite direction as Core Retail Sales, this can make price movement less predictable. The Retail Sales Report (which includes cars) is called the Headline Report, since it will be the one that newspapers (but not forex traders) will focus on.

There are many ways to place trades around news time. I will describe three of the most common, each based on a different time to place the trade:

Placing pending orders each way is called a straddle. People who do this usually place the pending orders about 3-5 minutes before the news is released. Stops and targets will vary quite a bit depending on the nature of the news report. The advantage of a straddle is that if there is solid movement in one direction, only one order triggers and (if the movement is far enough) your order closes with a nice profit. The risk of a straddle is that widening spreads and erratic price action can stop out in both orders.

You can try to get the news information and place a trade before most of the market has a chance to react. This is called spike trading. To do this, you need a fast internet connection, a way to get the news very quickly, and (if possible) a way to automatically place the trade depending on if the news deviation is big enough and in what direction the deviation is. There are companies you can buy news feeds from, like Reuters and Bloomberg. There are several autoclicker software packages out there that can be used to partially or fully automate placing the trades.

The third common way to trade the news is to wait for the initial spike to happen, then try to catch price movement back towards the pre-news price (price action back towards the pre-news price is called retrace). Learning to trade the retrace is something you can do by watching and demo trading (do NOT trade real money while learning to do this) over a period of time.

Other news trading questions I’ve seen from time to time:

What time zone are the Daily Trading Signals based on?

All Daily Signals trades by Crazy Cat are in US Eastern Time - New York Time. I personally find this convenient, since Florida is in the same time zone.

Where do the released news numbers come from?

Most of the numbers come from some government agency in the country that the news release is from. Some come from private groups.

The Daily Trading Signals are issued many hours before the news comes out, so there’s no way to know what the price will be when the time comes to enter. Targets from entries are given if the trigger number is reached or exceeded and you can get in before the spike. Stoploss would be hard to give, since different brokers widen their spreads by different amounts. 25 pips might work great for one broker, but will get taken out by wider spreads at another.

Interest rate changes can be described as fractions of a percent or as basis points. A 1/4% (or 0.25%) change can also be called a 25 basis points change.

Where can I see a list of news reports?

Every page in the FPA website has a top menu. Just click where it says Calendar. Currently, the calendar here is one of the fastest free calendars available, but it's still not quite fast enough to do spike trading.

Remember, if you are just learning to trade the news, start with demo trading just to familiarize yourself with market reactions to news events. When you move to live trading, remember that slippage and requotes will be MUCH worse than demo trading, so only risk the smallest amounts of money at first. Please read my article about Risk Management if you have any questions about this. Also, if you don't understand a particular trading signal, don't trade it with real money. It's much better to risk missing out on some profit than to risk throwing away your money on a misunderstanding.

I'd like to thank both Crazy Cat and Snow Man for their excellent suggestions and input on this article.

Can you tell us something about the comentary?

I will be short. Thanks for a great article. Please could you explain additionally also following:
1) sometimes Sir Pips (or previously Felix) mentions that we should be aware of the commentary (e.g. for BoE interest rate decision on December 06 2007). Where can we get this commentary on time, i.e. more or less immediately. I am a "Secret news weapon" user (a very satisfied one) , but snw makes me enter a trade, yet if I have to look after a commentary once I am in the trade, I need to look obviously for other resources. Is it bloomberg tv, or bloomberg.com, or BoE web site in this example?
2) Could you explain the terms hawkish & dovish
Thank you very much for your article, I hope you will have time to answer this additional questions, as I am sure they are of interest to all traders.

Thanks

Thanks Pharoh... nice job in summing up some of the basic concepts here. I'll probably find myself linking people to this article as it covers a lot of good foundation material. Let me know if you're in NY sometime and I'll buy you a drink.

More info please

Many thanks for the explanation but any chance of a few more details. Often, during the commentary Sir Pips will talk about approaching levels of resistance or support. What support is Sir referring to? Is it pivot points? psychological? previous highs/lows? or all of the above?
Sir will also talk about buying and selling levels that influence the price action. Presumably these levels are set by the big boys . How does Sir know where these levels are or is it just that he is is reading the price action.

Don't you just hate it when people ask questions and you aren't quite sure of the answers?

Happily, I managed to interrogate both Crazy Cat and Sir Pips to make sure I could provide semi-decent answers.

1) sometimes Sir Pips (or previously Felix) mentions that we should be aware of the commentary (e.g. for BoE interest rate decision on December 06 2007). Where can we get this commentary on time, i.e. more or less immediately. I am a "Secret news weapon" user (a very satisfied one) , but snw makes me enter a trade, yet if I have to look after a commentary once I am in the trade, I need to look obviously for other resources. Is it bloomberg tv, or bloomberg.com, or BoE web site in this example?

Some of these statements can be found on the websites of the organizations releasing the commentaries. I personally sometimes have suffered through a Bernake speech live on CNBC. Sir Pipsalot subscribes to a number of rather expensive news services that carry the speeches live and also provide quick access to written copies of commentaries, as well as analysis of the commentaries (commentaries on commentaries).

Dovish - indications of weakness in a currency. Statements like "We expect a massive drop in both exports and industrial productivity during the next 3 quarters, so we may have to cut interest rates further to prevent a total economic collapse." would be dovish.

Do note that Crazy Cat warns that trading speeches and statements is NOT an activity for beginners and says that he personally doesn't trade them. Personally, I'd never trade one unless I had someone with far greater expertise making the trading calls.

Many thanks for the explanation but any chance of a few more details. Often, during the commentary Sir Pips will talk about approaching levels of resistance or support. What support is Sir referring to? Is it pivot points? psychological? previous highs/lows? or all of the above?
Sir will also talk about buying and selling levels that influence the price action. Presumably these levels are set by the big boys . How does Sir know where these levels are or is it just that he is is reading the price action.

Sir Pips gets support and resistance as well as buying and selling levels from looking at higher time frame charts for trendlines, fibonacci numbers, moving averages, as well as previous highs and lows. Additionally, pivots come into play. Also, quite a bit comes from experience.

Calender

I am hoping someone out there in news trading land might have a good calendar or list of the "better trades" that typically move 30 pips + on a consistent basis. I am looking more for the spike trades (within seconds-5 min max) not so much the ones that take time. If anyone out that has traded news for a while has a list it would be greatly appreciated!

most off time i hear you use words like sllipage , and been stoped out can you please explian this terms also

I foresee a glossary in my future.

Slippage - You place (or close) an order at a certain price. Your broker fills your order at a worse price (the price "slips") and blames it on fast moving market conditions. Some brokers do this and only hit you for a few pips. Others will burn you for 20, 30, or even more.

Stopped out - Your order has a stop loss. This is a price you preset as the maximum amount you are willing to lose before your order closes automatically. During the news, prices can move up and down quickly, and hit your stop loss (thus "stopping you out") before moving in what would have been a profitable direction. Of course, you might experience slippage as you are stopped out, thus costing you even more money.

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